The Cure for America's Chronic Recession

The biggest issue in the general election will be the economy. And despite what corporate cheerleaders and Wall Street optimists say, the economy is not reviving any time soon. We're in a chronic recession, or worse. What to do?

First, understand some history.

From the 1930s through the 1970s, we assumed that the biggest economic challenge was to avoid recession or depression. The problem was on the demand side: There just wasn't enough of it. So we came to rely primarily on government spending to keep the pump primed and demand up. As Richard Nixon declared in 1971: "We are all Keynesians now." He was almost right.

But then came the late 1970s, and inflation became a bigger threat than recession. Put simply, there was too much demand relative to the nation's productive capacity. By the end of the 1970s, inflation was running at double digits. Fed chief Paul Volcker put a break on it by hiking interest rates so high he almost broke the economy, too. From then on we assumed monetary policy -- specifically, the Fed's capacity to dampen demand by raising interest rates -- was the most important lever of economic policy. Demand-management via fiscal policy fell into disrepute.

But the biggest challenge now, as it was before the 70s, is lack of aggregate demand. Consumers don't have enough money in their wallets to keep the economy growing. And the Fed is stuck. If it cuts interest rates much further it risks pushing the dollar lower. But that will spur inflation as everything we buy from abroad costs more.

So what's the answer? We've got to go back to fiscal policy -- big time. The tiny checks the Treasury just sent out are barely enough to pay our rising fuel bills. We need a stimulus package that's truly up to the job of restoring aggregate demand.

The best and easiest candidate for the large-scale stimulus that's needed is spending on the nation's crumbling infrastructure. America has deferred billions of dollars of maintenance on bridges, sewers, water systems, levees, and dams. That's already cost the nation dearly.

Problem is, the public doesn't trust the government to spend money on infrastructure wisely. Why should it, when so many earmarks go to dumb infrastructure projects like "bridges to nowhere"?

So here's the deal: The next president should establish a national capital budget that lists infrastructure projects in priority order, for the nation as a whole. No more earmarks. The capital budget will reflect the nation's true infrastructure needs. The government would fund that capital budget the way capital budgets should be funded - through borrowing that assumes a realistic return to those capital investments. This is what any smart business does.

Infrastructure spending, guided by that capital budget, would inject adequate demand into the economy to get us growing again. At the same time it would create millions of new jobs. And America gets the infrastructure we need for the twenty-first century.

It's a win-win-win.